Posted July 2013
“There are no limits. There are only plateaus, and you must not stay there, you must go beyond them.” ~ Bruce Lee
THE QUARTER IN BRIEF: Sometimes the direction of the both the stock and bond markets can change in a few sentences, even a few words. That was certainly the case on June 19th, when Federal Reserve Chairman, Ben Bernanke, mentioned the prospect of reducing the central bank’s monthly bond purchases later this year and the possible end of QE3 in 2014. A global selloff occurred after his remarks and the S&P 500 Index posted its first losing month for the year. For the quarter, however, the S&P 500 Index posted a solid gain of 2.91%. Bernanke’s comments also caused a spike in short term interest rates that caught most analysts and fund managers by surprise. The higher yields pushed most bond returns negative for the year. Through the second quarter, the broad Barclays Aggregate Bond Index was off -2.32%. Fears about the bond market broke an almost two year streak of inflows to bond funds as investors redeemed nearly $60 billion last month. Despite the June swoon for both stocks and bonds, however, there was plenty of positive economic news that provided optimism for investors’ continued confidence in the bull market’s strength.
DOMESTIC ECONOMY: While the markets groaned about the prospect of the Federal Reserve’s tapering of QE3, there was a great deal of positive economic news for the quarter. June’s manufacturing PMI jumped 1.9 points to 50.9, an indication of renewed expansion after a disappointing drop in May. The Labor Department reports showed an expansion in non-farm payrolls throughout the quarter which helped drive an increase in household incomes. The income rise contributed to an increase in both consumer spending and retail sales while inflation remained mild. The annualized CPI increase was 1.4% for the year ending in May. Real estate provided a stream of positive news with prices rising more than 12% for the year ending in May, the largest gain since 2006. Existing home sales, housing starts, and building permits all showed sizable gains during the past year even as interest rates rose during the quarter. For May, the annualized inflation rate was only 1.4%. Not surprisingly, consumer confidence surveys approached levels not seen since before the economic crisis in 2008. S&P upgraded America’s credit outlook to “stable” from “negative”, significantly reducing the chance of another U.S. credit rating downgrade. Overall economic growth, however, continued steady but weak. Varying economic growth forecasts were generally in the 2.5% range for the year. Although not robust growth by any means, keep in mind that government intervention in the economy does have a negative impact on growth. A number of analysts estimate that impact to be in the 1.5% range. If that is the case, the GDP gains are much more solid than the numbers indicate.
GLOBAL ECONOMY AND MARKETS: China’s economy showed distinct signs of cooling off throughout the quarter. Manufacturing continued to contract and fears emerged that China might fall short of its GDP target for the year. Meanwhile, the nation is working to focus its economy more on personal consumption than exporting and investing. The overall European economy still remained recessionary and the European Central Bank cut the eurozone GDP projection to -.6% for the year. It did, however, forecast 1.1% growth for 2014. Any growth would be helpful to the region where unemployment remains at more than 12%. Most world indices underperformed the U.S. with the MSCI World Index up .65% while the MSCI Emerging Markets Index was rocked -8.08%.